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Category Life Insurance

Trusts not recognised in some countries

05 August 2014 Lesley Maman, FISA member and Managing Partner of Maman Attorneys

Trusts are often created to consolidate and protect assets for tax purposes and estate planning. In the case of a minor or an incapacitated adult, trusts are used as a vehicle to protect their assets and ensure they are provided for.

Strangely, many Europeans are unaware of the concept of a trust, and, in many countries, trusts do not exist and are not recognised as a special vehicle for holding assets or diluting tax.

South Africa and the United Kingdom operate under "common law", but most European countries operate under "civil law," derived from Napoleonic law. Civil law is codified based on Roman law and the Napoleonic Codes, and common law is based on English common law. While common law changes through judgments, precedents and legislation, civil law is codified and only changed through legislation.

This brief explanation shows how issues arise in different jurisdictions by a simple line inserted in a will without considering the consequences:

"I bequeath my estate to the testamentary trust…"

The issue of trust recognition is a conflict of law problem. In relation to immovable property, common law and civil law interpret ownership rights in different ways. Under common law, immovable property has legal and equitable rights. Civil law however has only the legal rights relevant in civil law countries in which ownership and possession are the central concepts around which immovable property revolves.

Trusts are predominant in common law countries. Although some European civil law countries have signed the Hague Convention - the Recognition of Trusts, 1985, Greece is not a party to this Convention. Some other European countries created a similar entity and have adopted the concept into their civil law codes. Israel recognises the benefits of trusts and it is most advantageous to foreign beneficiaries particularly in regard to tax consequences and its primary requirement is that the trustees be Israeli.

Problems arise when a civil law jurisdiction is faced with a common law trust. The common law perspective views the trust as an entity created for beneficiaries and the preservation and protection of their equitable rights. In a civil law system the most important question in inheritance cases is “who inherits what?”

In countries such as Greece, a trust, as a separate legal entity, is viewed with confusion or suspicion and even as a "specialised foreign will, capable of taking control of your right to an inheritance". Here trusts normally appear only as a result of the bequest being contained within a "foreign" testamentary trust or in a will nominating an inter vivos or existing trust as the sole beneficiary.

Notwithstanding the failure to take any precaution to protect assets in Greece when drawing a South African will, the will must be registered with the relevant Greek probate authorities. However, if the will has a testamentary trust as the named beneficiary of immovable property, in Greece the debacle becomes very intriguing.

In Greece, beneficiaries to any asset in a deceased estate must “accept” their inheritance in writing through the Greek Probate Court. Once the will is registered, the named heirs follow a series of legal steps to be acknowledged as such. In some cases, named heirs become embroiled in court proceedings to be recognised. The Greek Probate Court, its administrators, and officials and the Tax Department, will look only to the foreign will if that is the one presented to them to determine who the heirs to the estate are.

When they interpret a clause which indicates the beneficiary is a trust or some similar form of devolution to an inter vivos trust, material problems quickly arise as the trust is not considered as a legal “entity” or “person”. Both testamentary and inter vivos trusts have no locus standi in Greece.

As the Probate Court in Greece will look to the trust as the named heir, but not recognise the trust as a legal entity, the situation is frozen and finalisation of the estate delayed indefinitely. The trust is viewed by the Probate Court in Greece as a peculiar “special purpose vehicle” to becoming an heir or as another form of will and devolution which foreigners are eager to apply to escape tax consequences. The trust is viewed as the “instrument” of acceptance or the means to inherit, rather than an entity that accepts, on trust, the assets to be held for the class of beneficiaries contained in its constitution. This being the case, the trust in Greece, cannot inherit, be a party to in any trial or court proceedings, or have any tax identification.

Since the trust and its representatives are not recognised in Greek law this means if there is immovable property in Greece placed in a foreign trust (created, for example, in a will) the immovable property is locked in an almost impenetrable non-existent entity. This non-existent entity is unable to follow the legal procedures necessary under the civil law applied in Greece, thereby severing right title and interest to the immovable property.

Unfortunately, many people who currently have their Greek immovable property bequeathed in their will or already in a trust may not have been informed that Greek law does not recognise trusts and has no rights. Therefore, any immovable property placed into the trust could damage the right, title and interest of the ultimate beneficiary. The trust severs the title to the land and devalues the property the settlor was attempting to protect for his beneficiaries.

Attorneys may not consider they could be harming their clients by including their client’s Greek immovable property in a testamentory or inter vivos trust. Similarly Greek lawyers do not utilise a trust vehicle in estate planning and register a will containing a trust as a matter of course into the Greek legal system, not realising the eventual impact even within an inter vivos trust document and even where there is a referral to the law of which country controls the trust. If the country where it is being filed does not recognise the trust entity, the controlling law will have little effect.

Property owned in Greece should be excluded from any trust. Define immovable property in Greece separately to secure the right, title and interest in it so beneficiaries are saved huge legal fees trying to free property from an unrecognised trust through multiple applications to courts in Greece and similarly in other countries in Europe where trusts are not recognised.

There is a haughtiness attached to the assumption that all legal entities are accepted and recognised in all countries. Once a testamentary trust is filed with the court where trusts are not recognised, it may take a long time to resolve and only on the rare occasion with experienced counsel may it be successfully challenged through careful examination of the constitution of the trust.

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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